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Uncover essential strategies, deductions, and smart financial tips and save taxes from your salary in the Financial Year 2023-24
Saving tax on a salary is a prevailing concern for numerous individuals in India.
Many salaried employees often wonder how to save tax from salary and explore avenues beyond the common 80C deductions.
The burden of taxation can weigh heavily on hard-earned income, making it imperative to navigate the complexities of the Indian tax system with precision.
In this blog, we will delve into the concept of tax planning, uncover various tax-saving components related to salary, and provide valuable tips to save income tax on salary.
Understanding Tax Planning
If you want to know how to save tax from salary, tax planning is the key to making the most of your earnings and achieving your financial goals.
Tax planning is like a smart financial strategy that helps you find legal ways to lower your taxable income and pay less tax overall.
But it's not just about paying less tax, tax planning also helps you stay on track with your savings goals.
During tax planning, you need to declare all your income and then use specific tax-saving investments or expenses that the government allows.
This way, you can reduce the amount of tax you have to pay and keep more money in your pocket.
Salary Components for Tax Reduction
Understanding how to save tax from salary income is crucial for ensuring a smooth tax filing process. By making use of specific salary components, you can effectively reduce your tax burden and retain more of your hard-earned money. Let's delve into these components and discover how to save tax from salary:
- HRA (House Rent Allowance)
If you live in rented accommodation and don’t know how to reduce tax on salary in India, the HRA can be a valuable tax-saving tool then. You can claim the lowest of the following three as tax-free:
- Actual HRA received.
- Excess rent paid (should be less than 10% of basic salary).
- 50% of salary plus dearness allowance (if living in metro cities) or 40% (if living in non-metro cities).
- LTA/LTC (Leave Travel Allowance/Concession)
LTA is designed to cover your travel expenses within India, along with your family. This includes your spouse, children, parents, and dependent siblings. Submit travel bills or tickets to your employer to claim this exemption, subject to certain terms and conditions.
- Car Maintenance Allowance
For employer-owned cars, this allowance covers the driver's salary, insurance, maintenance, and fuel. Taxable value depends on the car's cubic capacity. Example: Within 1.6 liters - Rs. 1,800 + Rs. 900 (if driver provided by employer); Exceeding 1.6 liters - Rs. 2,400 + Rs. 900 (if driver provided by employer).
- Children's Education and Hostel Expenditure Allowance
For children's education and hostel expenses, you can claim a deduction of Rs. 100 per month or Rs. 1,200 per annum per child (up to 2 children) and Rs. 300 per month or Rs. 3,600 per annum per child (up to 2 children) respectively.
- Uniform Allowance
This allowance covers the cost of the official uniform required for your job and is entirely tax-free.
- Medical Allowance
From FY 2019-20 onwards, the standard deduction for medical expenses has been raised to Rs. 50,000, providing substantial relief for self and dependents.
Having gained insights into these tax-saving salary components, it's time to explore some invaluable tips on how to save tax from salary in India.
Tips to save income tax on salary
Here is a list of 6 best tips that will guide you on how to save tax from your salary. Let's delve into each of these savvy strategies.
Keep Abreast of Current Tax Slabs and Rates
Familiarize yourself with the basics of income tax, the latest tax slabs, and rates applicable in the financial year 2023-24.
Knowing the income levels and corresponding tax rates, along with any additional surcharges or cess, will empower you to plan your finances proactively and learn how to save tax for a salary above 10 lakhs or how to save tax for a salary above 20 lakhs easily.
Maximize the Efficiency of Your Salary Structure
Take advantage of your salary structure to minimize taxable income. Discuss with your employer the possibility of restructuring your salary components.
Allocating more to tax-free allowances like House Rent Allowance (HRA) or Leave Travel Allowance (LTA) can lower your taxable income significantly.
Additionally, make use of tax-free reimbursements for expenses such as medical bills, telephone bills, and fuel expenses.
Explore Government Schemes for Investment
Government schemes offer attractive options that not only help you reduce your tax liability but also secure your financial future.
Save tax from Salary with Government-Backed Investment Schemes:
1. Public Provident Fund (PPF)
PPF is a long-term investment scheme that provides tax benefits under Section 80C.
It offers a tax deduction on contributions of up to Rs. 1,50,000 and comes with a lock-in period of 15 years.
The interest earned on PPF is tax-free, making it an excellent choice for those who are looking for how to save tax from income.
2. Employees Provident Fund (EPF)
EPF stands as a favored tax-saving tool among salaried individuals.
Both the employee and the employer contribute to the EPF account, and contributions are eligible for tax benefits.
The interest rate on EPF is determined by the government, and the amount is locked in until retirement. Partial withdrawals are permissible under certain conditions.
3. National Savings Certificate (NSC)
NSC is a post office investment scheme that qualifies for tax deductions under Section 80C.
It comes with a lock-in period of five years, and the interest rate remains fixed until maturity.
The minimum investment is Rs. 1000, and there is no maximum limit.
However, the tax advantage is capped at Rs. 1.5 lakh. The interest earned on NSC is taxable, but it is reinvested and eligible for deduction under Section 80C.
4. National Pension Scheme (NPS)
NPS is a government-sponsored pension scheme that offers tax benefits under Section 80CCD(1) and Section 80CCD(2).
It allows you to build a retirement corpus and secure your future. Contributions made towards NPS are invested in equity and debt instruments, offering the potential for long-term growth.
5. Avail Deductions under Section 80D
If you are wondering how to save tax on salary other than 80c, the answer is Section 80D.
This section allows you to claim deductions on health insurance premiums paid for yourself, your spouse, children, and parents.
Additionally, you can avail of deductions for expenses incurred on preventive health check-ups. It's a prudent move to safeguard both your health and finances.
6. Make the Most of Housing Loan Benefits
If you have a housing loan and don’t know how to save tax from salary income, make the most of tax benefits provided by the government.
Under Section 24(b), you can claim deductions on the interest paid on the housing loan.
Additionally, first-time homebuyers can explore additional deductions under Section 80EE.
These housing loan benefits can substantially reduce your taxable income, resulting in significant tax savings.
7. Consider Tax-Saving Mutual Funds
Tax-saving mutual funds, also known as Equity Linked Saving Schemes (ELSS), offer dual benefits of tax savings and the potential for capital appreciation.
Investments in ELSS funds qualify for deductions under Section 80C of the Income Tax Act.
ELSS funds come with a three-year lock-in period, facilitating long-term wealth creation. It is essential to assess the performance and risk profile of various ELSS funds before finalizing your investment choice.
Understanding how to save tax from salary is a valuable skill that can lead to significant financial benefits.
By diligently implementing the practical tips and strategies shared throughout this blog, you can effectively reduce your tax burden and optimize your hard-earned money.
Staying informed about the latest tax slabs and rates, thoughtfully optimizing your salary structure, and exploring the diverse range of tax-saving instruments available will empower you to secure a more stable and robust financial position.